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Bank Holding Company KeyCorp Sells a Fixed-to-Floating Preferred

KeyCorp, a $135 billion asset bank holding company, has sold a new fixed-to-floating rate preferred with a still stingy initial coupon of 6.125%.

The company obviously is trying to serve the interests of its common shareholders and seeking to keep its borrowing rate as low as possible. But in the face of rising interest rates, this initial rate looks to be a likely loser for individual income investors.

On an issue like this that is investment grade, but has a long fixed-rate term of 10 years, we focus on the substandard rate that you very possibly will be receiving for that length of time. While fixed-to-floating rate issues will trade firmer than straight fixed-rate coupon perpetuals, you still have interest-rate risk and likely will lose capital, based on an assumption that we are in a rate-hiking cycle.

We find almost no reason to buy investment-grade perpetuals at this point in time. We realize that some investors claim to be straight income seekers who are not overly concerned with capital drawdowns, but why risk it when it is unnecessary?

This new issue has a floating rate of the three-month LIBOR, plus 3.892%. Our preference is obviously for a higher fixed portion. But as long as investors continue to scratch hard for yield, this is the coupon we get — pure supply and demand.

We find almost no reason to buy investment-grade perpetuals at this point in time. We realize that some investors claim to be straight income seekers who are not overly concerned with capital drawdowns, but why risk it when it is unnecessary?

While fixed-to-floating rate issues will trade firmer than straight fixed-rate coupon perpetuals, you still have interest-rate risk and likely will lose capital, based on an assumption that we are in a rate-hiking cycle.